Europe’s New Hope?

May 4, 2017 Daniel Gros

The prospect that the centrist, pro-European Emmanuel Macron will be the next French president has fueled hope that renewed Franco-German leadership of the EU may be on the horizon. After Germany's general election in September, however, both countries may have to focus on sorting out Italy's weaknesses and priorities.

BRUSSELS – The prospect that the centrist, pro-European Emmanuel Macron will become the next French president has fueled hope that renewed Franco-German leadership of the European Union may be on the horizon. After Germany’s general election in September, it is hoped, a more stable EU could begin to make much faster progress toward unity and integration.

To that end, reforming the eurozone seems an obvious first step – one that Macron himself brings up often. But this might be more difficult than anticipated. For one thing, there are deep differences between the economic philosophies of policymakers in France and Germany.

As Markus K. Brunnermeier, Harold James, and Jean-Pierre Landau explain, Germany has become the champion of a rules-based system that emphasizes keeping deficits low and generally prohibits bailing out debtors. France, by contrast, tends to support the idea that the state should be free to intervene when needed, running a deficit or even providing a bailout to prevent a crisis. Fortunately, Macron’s program recognizes elements of the German approach, such as the need to balance the budget in the long term, which suggests that, under his leadership, a Franco-German compromise might be possible.

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Peter Lintner May 9, 2017

"...while helping to ease the burden on Italy of guarding the EU’s external border... "

Italy is guarding the external border? Since when? They bring in anyone who care to jump in boat in Libya with their Navy becoming a ferry service. Wonder how much they charge ....
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Henk Crop May 9, 2017

We do not only need hope in Europe, but above all clearity and focus. I do not find that much in the article.
Focus: After the Brexit and the political shifts in the Netherlands, Austria and also in France an answer is needed to respond to the decreasing populairity of the EU project. Focus has to be brought in the broad policy of the ever closer union. In the article of mr. Schwab in PS I have made some suggestions.
In this article you do not mention some economic issues.
France has the highest trade deficit of all West European countries and has a limited economic growth for some time. A turn around will not be easy.
An economic issue that also needs to be addressed is the debt-relief of Greece. Germany and the Netherlands in particular will, after the German elections, be put under pressure to write off their loans.
In the mean time with the low interest a transfer of capital takes place from the North to the South, at the expense of the pensionfunds and the savings of the families in the North. These will not be accepted when it lasts too long.
As far as immigration goes the EU operates extremely weak, slow and ineffectively.
Unintentionally the EU maintains the flow of immigrants and thereby also aids the people trafficers.
A Cost Guard or Navy is required.
But the false dream have to be killed, that you simply can enter the EU and then will get everything for free.
So, these immigrants have to be detained upon arrival and - unless they are a real refugees - extradited asap.
For this the EU immigrationlaws have to be changed.
The worst thing to do is to send them to other countries in the EU. That keeps the false dream alive, for the immigrants and their trafficers.
Italy may need some help from other countries. But once the dream disappears the flow of immigrants will decrease.
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j. von Hettlingen May 7, 2017

Daniel Gros says Europe's "new hope" is the Franco-German leadership under Emmanuel Macron and Angela Merkel, who is most likely to remain in power after the September election. It is expected that "a more stable EU" could help "make much faster progress toward unity and integration." Long-overdue reforms within the Eurozone are pressing issues on EU leaders' agenda.
Compared to Germany, France's economic performance still leaves much to be desired. Yet latest data show that growth is picking up, and there is hope that it will match Germany's one day, which faces the problem of a shrinking population. The two countries will have to work out their "deep" differences. The author thinks France's relatively high unemployment and public spending are still manageable and can be reduced, allowing Macron to cut taxes.
While France and Germany will eventually overcome the obstacles to reform of the Eurozone, Berlin has a problem with Italy. Germany does not have confidence in Italy's "long-term economic stability," which is a "combination of high debt and sluggish growth." The country has an unemployment rate of 11% and a banking sector in crisis, with government debt second only to that of Greece. This poses a problem to "fiscal integration" within the Eurozone.
Another issue that concerns Germany is Italy's management of the influx of refugees. Under the Dublin Regulation Italy is responsible for providing for the refugees arriving from across the Mediterranean. Yet most of them see Germany as their destination, prompting Berlin to find a "European approach, one that strengthens the EU’s capacity to guard its external borders," like funding a European Coast Guard, and relocating refugees according to a quota plan.
France has not been keen on taking in more refugees, because many French believe that immigration isn't "its main problem." It needs to focus on "the integration of the second generation of immigrants – and the extremism that failure on that front can beget." Macron has a lot on his plate. Apart from getting his country's economy back on track, and - at EU level - stabilising the Eurozone, he needs to focus on Italy and Germany, which are of two different strengths.
The author has a task for Macron - "putting together a package that responds to Germany’s priorities – namely, ensuring fiscal stability and securing limits on bank holdings of sovereign debt – while helping to ease the burden on Italy of guarding the EU’s external border and admitting refugees."
It remains to be seen whether "2017 really could become a turning point for Europe," because Italy's economy is vulnerable to external factors. Politically, the Eurozone's third largest economy is highly fragmented and polarised. Critics say Italian policy makers operate "in a precarious environment in that they must use political and economic weakness in order to mobilise the international assistance needed to maintain the internal social order as well as external economic survival."
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Walter Gingery May 6, 2017

There are rumors - and that's all they are, rumors - out of Beijing, that the Chinese have strongly urged Merkel to undertake the needed Eurozone reforms outlined here.

Merkel has agreed to undertake them in 2018/19, after the 2017 elections. If true, carrying through the reforms would require political skills of the highest order. Merkel is very good, but is she good enough? Time alone will tell. . . .
- Steve Hurst May 7, 2017
  
  Mauricio
  
  My view is this is about culture(s) and that is the worst thing to try and change.
  
  Elements in Poland - to name one - appear to see EU funds not as economic transitional aid but a form of ongoing compensation for what happened in and after WW2.
  
  Germany having suffered the economic turmoil of the 30's and the wasteland that followed WW2 is determined to hang onto cash at all costs.
  
  France historically has had anxiety about it's vulnerability to domination by Germany. The thinking behind the Maginot Line building pre WW2 is revealing - as is the roots of the EU in the initial demand of access to Germany's coal.
  
  The UK has a history of being worried about being drawn into continental conflict. Reforms in the UK were not undertaken willingly but forced by N Sea Oil making Sterling an Oil currency
  
  Somebody somewhere had the idea that force-fitting everything together would work by polarization. The polarization has occurred but has split the centre ground producing increased concern about national identity.
  
  The euro as a common currency along with Schengen gives a 2% operational advantage, take that away and a 2% step up in growth is needed just to stand still. No euro then no Schengen, no point in it.
  
  Other countries that are not industrial based inevitably have problems in a common currency without automatic transfers.
  
  Before anybody points out this is hopelessly short as an overview, I agree that, but the point is the EU's problems are both political and economic and as the economic problems do not appear to be able to be sorted the political ones stand no chance of being addressed.
  
  It is a very sad situation and hundreds of millions are affected and effectively could descend into economic civil war. There is also no doubt others would welcome a weaker EU.
  
  I return again and again to the fact that an organisation that could not move to give the UK a temporary cap on migration which would have knocked Brexit to one side is most unlikely to be able to solve major structural reform. The EU is simply not a flexible and responsive entity and risks being shown as a post war concept incapable of reform
  
  Then there is the issue of the gargantuan debt and the brilliant idea this debt should be open-endedly serviced by the taxpayer by 'whatever it takes' which is just a massive deferment device and currency debasement
  
  If somebody passed me the prospectus and said will you buy I would say nope, come back when you have raised a reality check and cashed it
  
  (BTW I find it disappointing when people take about 0.5% growth for France when the issue is a 20% disadvantage with Germany and use phrases like 'differences may not pose an insurmountable obstacle to cooperation'. This is just death by blandishments)
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- Mauricio Duran-Loriga May 7, 2017
  
  I agree with Steve.
  Germany has to transfer wealth to other member states, or else.
  Merkel is elected time and again because she perfectly mirrors the abhorrent ultra stingy German taxpayer.
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- Steve Hurst May 6, 2017
  
  I think this could only be fearsome challenge. The EU was prepared to let the Brexit occur rather than agree a cap on migration to one country or asabatical whilst the matter cooled off - which in reality was a minor thing to agree. EZ reform requires 19 members to agree and there have already been issues in the German Bundestag about any changes that take money away from Germany. The EZ cannot work unless there is a Federal EZ and trust has been destroyed all around and no member state will move to relinquishing sovereignty in the foreseeable future. The euro is the Trojan Horse and national politics the Achilles Heel
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jagjeet sinha May 6, 2017

Daniel
Rome has sacrificed every Constantinople that it partnered.
Unlikely that Paris Berlin or Brussels will be spared.
Ask America - the last Constantinople ??
Or, speak to Trump !!
JS
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Bernhard Kopp May 6, 2017

Mr. Gros probably knows quite well that a 'rule based system' is first and foremost a stable legal system, the rule of law. Without such legal stability and reliability, any national or supranational system has no confidence and ultimately no democratic legitimacy. It just cannot be that opportunistic, short-term decisions of governments, and political parties can change rules/laws at a whim. If the Maastricht rules are not good enough, then the rules must be changed in an open democratic debate and in a legitimate legislativ process. As we have experienced with Greece, and the USA are experiencing with Puerto Rico these days, just letting governments borrow and borrow is doomed.
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Mauricio Duran-Loriga May 5, 2017

Two French hollow skull French Presidents in a row spells any hope?

The only real hope is creating net wealth on a sustainable basis.

France, alike Europe, has chosen the path to sink in ever growing debt, rain or shine.

The cascading edge of the infinity pool is getting nearer, not further away. Despite the band playing on the Titanic deck.
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Val Samonis May 5, 2017

Too little, too late! The Eurozone will collapse.
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M M May 5, 2017

Macron, and assuming he is elected as President of France, shall be able to do absolutely nothing. He is no match to the German machine, actually he is a blessing for them. He has and shall have no means or power to change anything at the EU level. The German establishment are after changing the French rules and making them as compatible as possible with their own rules and everyone knows by now what that means, it is either the German way or the German way (meaning the German rules and only the German rules). Varoufakis said it a while back, that it is France that the German establishment are after to change. Combine this with the challenges that anyone shall be facing with the EU establishment. Macron shall also have strong resistance within France to any changes or policies that shall involve job losses or any reduction of personal income. On the banking rules, one needs to look at the credit ratings of the EU countries and the credit ratings of the banks operating within the EU to see the lack of divergences and the nearly impossible mission to get anything done regarding any banking union and this does not even take into account the challenges that shall be brought about following Brexit and the constant flow of illegal migrants. Very interesting and worrying times ahead.
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Bernhard Kopp May 4, 2017

It remains to be seen how President Macron can govern after the parliamentary elections in June. Chances are that a few 'holy cows' of the French politics could be slaughtered, but not too many. There is a high probability that France and the EU will continue to muddle along, not really getting anywhere. Italy and Spain are unlikely to be much help, neither will be the Brexit negotiations. The German position will not be clear before the new government takes office. Germany will more likely agree to some debt mutualisation over and above the ECB and ESM portfolios, including the target-balances in the Euro-system, then a common deposit insurance scheme, or even a common unemployment benefits scheme. There is not much hope for a true revitalization of the EU/Euroland-project.
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Steve Hurst May 4, 2017

On report states ... 3% of those turning up in Italy are refugees.
The rest are economic migrants. Whether this figure is right or not is moot point, but one thing is for sure there are a lot of migrants that are economic migrants not refugees

The United Nations refugee agency (UNHCR) said 181,436 migrants arrived in Italy last year, however only 4,808 were granted asylum seeker status.

The UNHCR report said 90,334 of the migrants did not even bother to request asylum but simply disappeared into the black market economy.

Of the 91,902 who applied for asylum, 54,252 had their requests rejected unconditionally.
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